What does an eighteenth century French philosopher have to offer today’s merger and acquisition industry?
For those of you who might not be au fait with 18th century French philosophers (a category I firmly fall within), Denis Diderot was a writer, art critic and general deep thinker during the Age of Enlightenment. He was a self-described son of the bourgeoisie who shunned the staid existence of his parents to pursue a bohemian existence while pondering life’s mysteries. Diderot was most famous for being a founder and editor of the Encyclopédie, meant to be a compendium of all relevant reasoned knowledge up to that point in time. He was also a bit of libertine and his bibliography includes more mature subject matter. However, for the sake of our purposes we shall focus on him being the source of the eponymous “Diderot Effect.”
What is the Diderot Effect and how does it apply today?
The Diderot Effect is the phenomenon which compels us to continue purchasing more goods once we have bought the first shiny new object. The effect points to the voracity of our desire and how this tendency can push us into a process of spiraling consumption. I am sure we can all relate to this. Who among us has bought a new rug for our house only to realise that we now need a new lamp and a matching dining set to maintain the tonal temperature of the room? Or when was the last time we bought a new pair of chic shoes only to find in our shock horror that the rest of our wardrobe needs an upgrade to create the right ensemble?
Can we say modern acquirors suffer this same effect?
I am sure we all have our favorite anecdotes of multi-million dollar mergers that have gone awry. The largest megamerger of its time, AOL acquired Time Warner for $165 billion in 2001 only for the amalgamated company to post a loss of $99 billion in the very next year. A loss mainly attributed to the writeoff of AOL’s goodwill with its large customer base. Going into the merger, the two companies intended to capitalise on the move to high-speed broadband from the dial-up service AOL subscribers were accustomed to; however, rather than collaborating effectively for a rosy future state the two divisions descended into a turf war with Time Warner pitching its own Road Runner service rather than consolidating efforts into AOL. The politics of the companies and the ensuing culture clash were not managed head on and doomed them as a merged entity.
Another classic example of the Diderot Effect in the world of M&A is the acquisition of Snapple by Quaker Oats in 1994. Quaker Oats was already in the beverage business with Gatorade forming part of its portfolio (Pepsico later acquired all of Quaker Oats to get access to the crown jewel of Gatorade in 2001). This drinks experience bolstered Quaker to think it could make the most of the Snapple brand despite the heady price tag of $1.7 billion. However, Quaker miscalculated on two fronts when it came to the integration of Snapple: 1) it did not know how to manage the smaller distribution channels of gas stations and bodegas that fuelled most of Snapple’s sales; and 2) it whiffed on its advertising campaign as it did not embrace the unique brand and culture that resonated with Snapple drinkers. Erosion of brand equity translated in devaluation of the company.
A plan beats no plan every day of the week
It may come as a surprise that this cautionary tale is coming from messengers such as ourselves. After all, we, as players in the M&A field, should only relish in the rising tide of M&A activity like the farm cat that is waiting patiently for the overspill of cream from the dairy farmer’s milk vat. Do not get us wrong, of course we are. But we also have to ensure that the reason to engage in the acquisition is the correct one and that we do not get swept up in the hysteria and let the compulsion described above lead us into a blind alley of acquiring pretty things (or companies for that matter). One must go clear-eyed into any acquisition and truly understand how they are going to get the most value: for its customers, for its employees and for its shareholders.
Often, investors spend endless amounts of advisor time and fees in due diligence to ensure that what they are buying is truly what is documented on paper. They might even have a skeleton of an integration plan when they make their first anchor acquisition with a view of a consolidated behemoth that will rule the market in a few years. But just as investors are deliberate in taking the painstaking steps of due diligence each time the purse strings are unfurled, the integration plan must be dusted off and refreshed and the question must be asked how will this next acquisition be made a success within our long term plan. Too often we have seen a lack of integration focus lead to lack of implementation of post-acquisition plans. Rather than get swept up in the compulsion, should we not take a breath, think of Diderot and make a plan that would make him proud?
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